One of the criticisms about fixed indexed annuities, often raised by the NASD and others in the securities industry, stems from the liquidation of elderly clients’ stock and mutual fund accounts in order to put the money into an annuity. Moving money from one financial instrument into another is a strategy that has taken on many forms over the years: converting an IRA into a Roth IRA; cashing in a 401(k) early, paying the tax, and investing the money otherwise; removing equity from a home and investing it in a side fund; and liquidating stocks or mutual funds and moving the money into a fixed indexed annuity. Any of these strategies have their supporters and their detractors, but the glaring difference in this list of complex strategies, which need to be evaluated on an individual basis, is that the move of a senior citizens’ money out of a risky stock or mutual fund into a safe and guaranteed fixed indexed annuity, is a financial no-brainer. That is, unless you are the broker or broker dealer who is losing the account and all future commissions to an insurance agent and the company who issues the annuity.
The majority of individuals and couples in retirement begin this phase of their life with a fixed amount of income and assets from which to live on for the rest of their lives. Even those who have done a good job of saving and planning may only have a slightly larger pot from which to dip, and still have to make their limited assets and income stretch for two or maybe three decades. One of the biggest fears expressed by elderly Americans is that they might outlive their resources. With growing uncertainty about the continuation of Social Security benefits, the potential for increases in taxes, the rising cost of medical and prescription expenses, and the looming threat of long term care expenses, seniors have a lot of areas that directly affect the quality of their retirement over which they have no control. To add the possible loss of the principal value of their fixed asset base to this ominous list, due to fluctuations in the market, is not only unwise, but is irresponsible. And any broker or advisor who continues to place these seniors’ assets at risk is the one who should be chastised for endangering the financial security of our elderly population.
Of all the financial avenues available for a senior adult to store their nest egg, there is only one place where their principal is 100% guaranteed, they receive a guaranteed interest return plus a chance to get a higher return, they have good liquidity and access to their money at all times, and they have the ability at any time to create a guaranteed stream of income they can never outlive. This amazingly perfect solution to all of the needs and concerns of retirees is none other than the fixed indexed annuity. This product, and this product alone, resolves the biggest fear of all seniors, that they might outlive their money. While bank CDs and bonds might offer security, they do not have the return potential of a fixed indexed annuity, and they DO not offer a guaranteed lifetime income option.
But this discussion began by pointing out that some in the securities industry suggest that it is inappropriate to move a senior’s money out of stocks and mutual funds into a fixed indexed annuity. The thing that is lacking from these critics is not their condemnation about annuities, but a simple explanation of why securities should ever be construed as an appropriate investment for anyone who is retired or living on fixed assets and income.
Consider that the market continually goes through cycles, and that any senior who lives more than a decade in retirement will likely experience at least one market correction, or downturn. Historically it takes years for the market to return to its original point before it recovers all of the losses incurred in a correction and begins climbing above that previous benchmark. If you are 65, 70, 75 or older, and your asset base, which is providing a portion of your income, suddenly loses a significant amount of its value, your financial security is immediately compromised. First of all, you are no longer earning ANY return on this asset and if your plan was to live off the interest only, that plan is terminated until the market fully rebounds and starts to return a substantial gain. So, the choices to the retiree caught invested in the market are to liquidate principal or reduce their standard of living just to take up the slack caused by the loss of their asset value. The greater the losses in the account value, or the longer the downturn continues, the higher the risk that the asset base can be so badly eroded by the combination of losses and withdrawals, that this person will not live long enough to ever be able to recover financially, and could run completely out of money in a few short years.
When there is a safe alternative that can completely remove all of these negative probabilities, why in the world would any intelligent person ever want to expose themselves to that risk, just for the chance to get a few points more return in a few of the good years? The reason our seniors continue to buy into this false illusion, that the only way they can secure their retirement is to place it at risk, is because of the social pressure to maintain the status quo. Our society carries the greed of our youth to get all the return we can get, right into our later years, when in fact, we should be slowing and making the transition in our investments from risk to security over the last few decades of our working careers. Retirement is not just a continuation of our previous career paths, but it requires a complete shift in goals and priorities, and our financial gears need to shift dramatically from accumulation to preservation by the time we stop receiving earned income.
In discussing this issue of mutual funds for seniors versus fixed indexed annuities, there is no uncertainty. The annuity is the only choice for the retiree. Safety, security, guarantees, versus risk, fear, losses, and potential for financial disaster. There is no argument which considers the complete well being of the senior that can offer any other recommendation than to place their retirement savings in a fixed indexed annuity.
Brokers who continue to prey upon seniors and endanger their retirement security should be held accountable for their bad advice and unsuitable recommendations. Insurance agents, or any other advisors who recommend that a retiree remove the risk from their assets and move their money from stocks and mutual funds into the safety and security of a fixed annuity, should be applauded. The bias of the NASD and the securities industry is rooted in their greed, and ignores the best interests of their clients. I wonder if brokers were made to take fiduciary responsibility for their recommendations, how many would continue to provide such faulty advice to our seniors.
Tuesday, January 30, 2007
Thursday, January 25, 2007
Maturity Date Is GOOD for Annuity Owner
In the recent action taken by the Minnesota Attorney General against Allianz, I read that one of the concerns she raised in the sale of indexed annuities to seniors is that the maturity date is almost always decades in the future. The statement was made that this locks up the client’s money so that they cannot get to it until the maturity date arrives. This misconception is probably one of the biggest misunderstandings about the inner workings of insurance products, and the Minnesota Attorney General is not the first person to make such criticism based on this inaccurate conclusion. Unfortunately, not only is this information completely WRONG, but such false statements unnecessarily fuel the fear in senior annuity owners that they will not be able to access their money when they want, and provides them the motivation to cash in their policies early, which forces them to pay surrender charges for no reason. In an effort to help save some poor elderly annuity owners the trauma and expense of worrying about an issue that is really one of their policy benefits, I want to fully explain what a maturity date in an annuity is all about.
Every insurance contract, whether it is life, health, or an annuity, is a unilateral contract. What that means is that there is no negotiation by the applicant on the terms of the contract. The client is underwritten, based on established qualifying criteria, which by the way are set by the company and approved by the state insurance departments, and then the company makes the offer of the contract, to which the applicant can only accept or reject. In an annuity application, the only underwriting is financial. Someone wishing to purchase an annuity has to provide information that supports that this purchase is “suitable,” a financial evaluation made by the agent, and reviewed and confirmed by the issuing company. This standard of suitability is somewhat arbitrary, but the industry is slowing narrowing its definition into more quantifiable terms.
Once a policy is issued, the client always has a “free look” period, which ranges from 10-30 days depending upon state, whereby they can read the complete text of the contract, have it reviewed by an attorney, a CPA, or anyone else they so desire. If for any reason they decide they do not want to enter into this contract, all they have to do is return the policy as “not taken” before the end of the free look period, and the company will return any premium in full, and cancel the contract as if it never happened. Ironically, once the company offers a contract to an applicant, barring the discovery of false or missing information, the company does not have the right to withdraw the offer. Once the free look period passes, however, the contract becomes binding on both the company and the applicant, and terms of the contract apply.
Once again, the only condition and performance under the contract for the annuity owner is to deposit the initial premium, and to leave that money deposited for the contract term, which coincides with the surrender period. If there is a 10 year surrender period, then the owner is agreeing to leave their money deposited in the contract for those 10 years in order to gain ALL of the benefits of the contract.
Still, every annuity provides three other features during that contract period to give the owner access to their money, even before the end of the contract term. First, there is always some type of free withdrawal privilege, which is clearly stated in the policy. This varies by contract, but in many cases the owner can withdraw 10% of either the account value or the original deposit each year, without incurring any surrender charge. In some contracts, special needs or conditions, such as nursing home stay, or terminal illness may increase the amount of this free withdrawal up to the full account value.
Second, there is a provision for the owner to annuitize all or part of the account. In other words, they exchange the account value with the insurance company for a guaranteed stream of income. Similar to a pension, once they convert the account balance to an income stream, they no longer own the asset, but own the rights to this guaranteed income, based upon the terms of the payout period chosen.
Finally, if the client wants to withdraw more than what is allowed in their free withdrawal privilege, they can surrender all or part of their account. Whatever amounts they withdraw in excess of their free withdrawal will be subject to the surrender charges stated in the written contract they received at the very beginning, and were allowed a free look period to review before accepting its terms. This means that surrender charges should NEVER be a surprise to any annuity owner, unless they choose not to read the contract to which they willingly entered.
Now, on to the maturity date. In every annuity contract, in exchange for the deposit of money by the annuity owner, the insurance company offers a number of benefits. The withdrawal or income benefits mentioned above are part of the insurance company’s contractual obligation. In the case of the guaranteed income, the owner may exchange their account for a lifetime income. In such cases, the insurance company is obligated to pay the client the agreed stream of income, regardless of how long they live, even if it means that the insurance company has to pay out more than the amount that was in the account value.
The client’s principal is always 100% guaranteed throughout a fixed annuity contract, and the value of their deposit can never go down, unless they withdraw money from their account. In addition, the insurance company agrees to pay the owner interest on that deposit. In many cases this interest rate is guaranteed, or a minimum interest is guaranteed. In an indexed annuity, there is the opportunity for that interest credit to increase based upon changes in some stated measurement of an outside index.
The purpose of the maturity date is to specify in the contract the period of time whereby the company has to continue to provide all of the stated benefits to the annuity owner. While the annuity owner has provisions to break the contract early, sometimes with penalty, there is no such provision for the insurance company to break the contract early under any conditions. Their time frame is set for the entire period stated in the contract up until the maturity date. It is ONLY at this time that they can require that the annuity owner take their money back with earnings, either in the form of a withdrawal; which since this date is long past the surrender period, there is no cost to do so; or to annuitize the account balance into a stream of income. Prior to the maturity date, the insurance company may not force the annuity owner to take ANY money out of their non-qualified account if they don’t want to. In practice, unless the financial conditions have drastically changed in a way that disadvantages the insurance company, it is unlikely that any of them would ever force an elderly annuity owner to even take their money out at the maturity date, if they were still living. If you check this date, in relation to the owners age, the maturity date is usually well past the life expectancy of most people.
So, any argument that the maturity date somehow ties up an annuity owner’s money is completely false and indicates a total lack of understanding about insurance terminology. I challenge the Minnesota Attorney General, members of the securities industry, and financial journalists to cease and desist spreading unnecessary fear and panic among our seniors who have purchased, or are planning to purchase some type of fixed annuity, by their continued use of false information or insinuation. This reckless use of pubic visibility is hurting our retirees and is costing them money. If you are sincere about your concern for this segment of our population, stop using them as a political football for your own purposes and advances. Maturity dates are one of the MANY guarantees that fixed indexed annuities contain that make them not just suitable for the senior population, but are the ONLY financial vehicle which can offer them all of the safety and guarantees seniors want, with a reasonable rate of return.
Every insurance contract, whether it is life, health, or an annuity, is a unilateral contract. What that means is that there is no negotiation by the applicant on the terms of the contract. The client is underwritten, based on established qualifying criteria, which by the way are set by the company and approved by the state insurance departments, and then the company makes the offer of the contract, to which the applicant can only accept or reject. In an annuity application, the only underwriting is financial. Someone wishing to purchase an annuity has to provide information that supports that this purchase is “suitable,” a financial evaluation made by the agent, and reviewed and confirmed by the issuing company. This standard of suitability is somewhat arbitrary, but the industry is slowing narrowing its definition into more quantifiable terms.
Once a policy is issued, the client always has a “free look” period, which ranges from 10-30 days depending upon state, whereby they can read the complete text of the contract, have it reviewed by an attorney, a CPA, or anyone else they so desire. If for any reason they decide they do not want to enter into this contract, all they have to do is return the policy as “not taken” before the end of the free look period, and the company will return any premium in full, and cancel the contract as if it never happened. Ironically, once the company offers a contract to an applicant, barring the discovery of false or missing information, the company does not have the right to withdraw the offer. Once the free look period passes, however, the contract becomes binding on both the company and the applicant, and terms of the contract apply.
Once again, the only condition and performance under the contract for the annuity owner is to deposit the initial premium, and to leave that money deposited for the contract term, which coincides with the surrender period. If there is a 10 year surrender period, then the owner is agreeing to leave their money deposited in the contract for those 10 years in order to gain ALL of the benefits of the contract.
Still, every annuity provides three other features during that contract period to give the owner access to their money, even before the end of the contract term. First, there is always some type of free withdrawal privilege, which is clearly stated in the policy. This varies by contract, but in many cases the owner can withdraw 10% of either the account value or the original deposit each year, without incurring any surrender charge. In some contracts, special needs or conditions, such as nursing home stay, or terminal illness may increase the amount of this free withdrawal up to the full account value.
Second, there is a provision for the owner to annuitize all or part of the account. In other words, they exchange the account value with the insurance company for a guaranteed stream of income. Similar to a pension, once they convert the account balance to an income stream, they no longer own the asset, but own the rights to this guaranteed income, based upon the terms of the payout period chosen.
Finally, if the client wants to withdraw more than what is allowed in their free withdrawal privilege, they can surrender all or part of their account. Whatever amounts they withdraw in excess of their free withdrawal will be subject to the surrender charges stated in the written contract they received at the very beginning, and were allowed a free look period to review before accepting its terms. This means that surrender charges should NEVER be a surprise to any annuity owner, unless they choose not to read the contract to which they willingly entered.
Now, on to the maturity date. In every annuity contract, in exchange for the deposit of money by the annuity owner, the insurance company offers a number of benefits. The withdrawal or income benefits mentioned above are part of the insurance company’s contractual obligation. In the case of the guaranteed income, the owner may exchange their account for a lifetime income. In such cases, the insurance company is obligated to pay the client the agreed stream of income, regardless of how long they live, even if it means that the insurance company has to pay out more than the amount that was in the account value.
The client’s principal is always 100% guaranteed throughout a fixed annuity contract, and the value of their deposit can never go down, unless they withdraw money from their account. In addition, the insurance company agrees to pay the owner interest on that deposit. In many cases this interest rate is guaranteed, or a minimum interest is guaranteed. In an indexed annuity, there is the opportunity for that interest credit to increase based upon changes in some stated measurement of an outside index.
The purpose of the maturity date is to specify in the contract the period of time whereby the company has to continue to provide all of the stated benefits to the annuity owner. While the annuity owner has provisions to break the contract early, sometimes with penalty, there is no such provision for the insurance company to break the contract early under any conditions. Their time frame is set for the entire period stated in the contract up until the maturity date. It is ONLY at this time that they can require that the annuity owner take their money back with earnings, either in the form of a withdrawal; which since this date is long past the surrender period, there is no cost to do so; or to annuitize the account balance into a stream of income. Prior to the maturity date, the insurance company may not force the annuity owner to take ANY money out of their non-qualified account if they don’t want to. In practice, unless the financial conditions have drastically changed in a way that disadvantages the insurance company, it is unlikely that any of them would ever force an elderly annuity owner to even take their money out at the maturity date, if they were still living. If you check this date, in relation to the owners age, the maturity date is usually well past the life expectancy of most people.
So, any argument that the maturity date somehow ties up an annuity owner’s money is completely false and indicates a total lack of understanding about insurance terminology. I challenge the Minnesota Attorney General, members of the securities industry, and financial journalists to cease and desist spreading unnecessary fear and panic among our seniors who have purchased, or are planning to purchase some type of fixed annuity, by their continued use of false information or insinuation. This reckless use of pubic visibility is hurting our retirees and is costing them money. If you are sincere about your concern for this segment of our population, stop using them as a political football for your own purposes and advances. Maturity dates are one of the MANY guarantees that fixed indexed annuities contain that make them not just suitable for the senior population, but are the ONLY financial vehicle which can offer them all of the safety and guarantees seniors want, with a reasonable rate of return.
Wednesday, January 24, 2007
Fixed Indexed Annuities- FIA
I recently went to a sales meeting where some of the biggest carriers in the indexed annuity business were present and they all were using the new name of Fixed Indexed Annuity, or FIA for short, and had dropped the word "equity" from the name completely. If you read my recent post of "There is no EQUITY in Equity Indexed Annuities," you can see one of the reasons for this change. Another reason obviously is the volume of negative publicity these wonderful insurance products have received simply by having this verbal reference to equity products. I applaud these companies for this adjustment in the label we use for indexed annuities, and recommend that all agents begin to use this new reference immediately, which accurately describes this insurance product, and never let the "E" word cross your lips again.
Thursday, January 18, 2007
The TRUTH about Surrender Charges in Indexed Annuities
The securities industry opponents of indexed annuities have used the surrender charges, for early termination of an annuity contract, as a claim of high expenses involved with the purchase and owning of an indexed annuity. Besides the fact that this is a complete lie, suggesting that surrender charges are a negative about indexed annuities that should inhibit people from purchasing them, is simply a scare tactic used by the securities industry to try to get back some of the $24 billion a year it has been losing in sales for several years to these fantastic financial products.
The truth is that an indexed annuity is a contract, not an investment, and as with any contract, once you agree to its terms, you have the legal obligation and responsibility to abide by its conditions, and if you want out of a contract early, there is always a penalty. In most contracts, there is either an early termination fee, or the party breaking the contract can be sued for breech of contract. When you are selling your home and someone makes an offer that you accept, a binding contract is created. If that person decides before closing that they do not want to purchase your house, you have legal rights to enforce the contract, or else receive some form of restitution for their breech of your agreement. In most cases, you can at least keep their earnest money deposit for their failure to perform under the contract.
If you have ever gotten one of those nice new cell phones at a discounted price at your service provider, you had to sign a contract stating you would continue service with them for either a one or two year period, depending upon the amount of discount you received. If for some reason you wanted to end that service before the end of that period, you are still legally obligated to continue to pay the monthly service fee until the end of the contract, or else pay them a lump sum termination fee. With my company that termination fee is $175. I wonder how many people, lusting after the latest cell phone technology, really understand what they are committing to when they quickly sign that extra piece of paper, as they get their sexy new phone.
If you sign a lease agreement to rent an apartment or office space for one year, or you join a gym and sign a one year contract, you are legally obligated to pay the entire year’s worth of payments, even if you later want or have to move out of the rental space, or if you want to cease going to that gym. As you can see, we enter contracts throughout our lives, and accept their terms without question; at least until abiding by their conditions becomes an inconvenience for us. Contracts should therefore, never be taken lightly, and ALL terms of a contract should be accepted and understood BEFORE you sign any fine print. Once you sign your name, whether you have read it carefully or not, you ARE agreeing to every single detail that the fine print contains.
With an indexed annuity, the insurance company is committing to a long term set of benefits and guarantees that will cost them money to provide. The only commitment, to which the purchaser of an annuity is agreeing, is to deposit premium and leave it with the company for a stated period of time. If the purchaser wants to get out of the annuity contract early, fortunately, there is a legal provision for that, and that is by way of surrender. In this case, however, if the surrender is made during the surrender period, the insurance company is legally allowed to deduct a previously agreed fee from the client’s account to help cover their lost cost, expenses, and profits that were to be spread out over the entire term of the contract. If the annuity owner holds the contract as agreed, however, and does not seek to end it before the contract term has passed, surrender charges are irrelevant. The only time surrender charges will ever be assessed on an annuity contract is when the client, of their own choosing, reaches in and takes out more money from their contract than the allowed annual “free” withdrawal, or if the client terminates the entire contract early. Even then, the surrender charge has been fully disclosed in writing since day one, and the agreed deduction is only assessed against any contractually excess amounts withdrawn.
For anyone to call a surrender charge an expense of owning an annuity contract is misleading the public and spreading false information about these products. These scare tactics have caused fear and panic, and lead many elderly annuity owners to take rash actions that have unnecessarily cost them money. It is irresponsible for anyone to scare innocent annuity owners by suggesting that they may have these fees deducted from their contract other than as the contract indicates. I am certain that many of the seniors who have hastily cashed in their entire annuities, just because negative publicity gave them wrong information about surrender charges, actually ended up, because of their own action, paying the full surrender charges unnecessarily when they gave up their annuity early, because of the lies being spread by members of the securities industry. If these same annuity owners had known the truth, and had left their money in their annuity, they would continue to have full access to the use of their money in the form of withdrawals or annuitization, they would continue to earn a reasonable interest rate, their money would be safely guaranteed in a secure contract, and they would have never had to pay ANY surrender charges.
The truth is that an indexed annuity is a contract, not an investment, and as with any contract, once you agree to its terms, you have the legal obligation and responsibility to abide by its conditions, and if you want out of a contract early, there is always a penalty. In most contracts, there is either an early termination fee, or the party breaking the contract can be sued for breech of contract. When you are selling your home and someone makes an offer that you accept, a binding contract is created. If that person decides before closing that they do not want to purchase your house, you have legal rights to enforce the contract, or else receive some form of restitution for their breech of your agreement. In most cases, you can at least keep their earnest money deposit for their failure to perform under the contract.
If you have ever gotten one of those nice new cell phones at a discounted price at your service provider, you had to sign a contract stating you would continue service with them for either a one or two year period, depending upon the amount of discount you received. If for some reason you wanted to end that service before the end of that period, you are still legally obligated to continue to pay the monthly service fee until the end of the contract, or else pay them a lump sum termination fee. With my company that termination fee is $175. I wonder how many people, lusting after the latest cell phone technology, really understand what they are committing to when they quickly sign that extra piece of paper, as they get their sexy new phone.
If you sign a lease agreement to rent an apartment or office space for one year, or you join a gym and sign a one year contract, you are legally obligated to pay the entire year’s worth of payments, even if you later want or have to move out of the rental space, or if you want to cease going to that gym. As you can see, we enter contracts throughout our lives, and accept their terms without question; at least until abiding by their conditions becomes an inconvenience for us. Contracts should therefore, never be taken lightly, and ALL terms of a contract should be accepted and understood BEFORE you sign any fine print. Once you sign your name, whether you have read it carefully or not, you ARE agreeing to every single detail that the fine print contains.
With an indexed annuity, the insurance company is committing to a long term set of benefits and guarantees that will cost them money to provide. The only commitment, to which the purchaser of an annuity is agreeing, is to deposit premium and leave it with the company for a stated period of time. If the purchaser wants to get out of the annuity contract early, fortunately, there is a legal provision for that, and that is by way of surrender. In this case, however, if the surrender is made during the surrender period, the insurance company is legally allowed to deduct a previously agreed fee from the client’s account to help cover their lost cost, expenses, and profits that were to be spread out over the entire term of the contract. If the annuity owner holds the contract as agreed, however, and does not seek to end it before the contract term has passed, surrender charges are irrelevant. The only time surrender charges will ever be assessed on an annuity contract is when the client, of their own choosing, reaches in and takes out more money from their contract than the allowed annual “free” withdrawal, or if the client terminates the entire contract early. Even then, the surrender charge has been fully disclosed in writing since day one, and the agreed deduction is only assessed against any contractually excess amounts withdrawn.
For anyone to call a surrender charge an expense of owning an annuity contract is misleading the public and spreading false information about these products. These scare tactics have caused fear and panic, and lead many elderly annuity owners to take rash actions that have unnecessarily cost them money. It is irresponsible for anyone to scare innocent annuity owners by suggesting that they may have these fees deducted from their contract other than as the contract indicates. I am certain that many of the seniors who have hastily cashed in their entire annuities, just because negative publicity gave them wrong information about surrender charges, actually ended up, because of their own action, paying the full surrender charges unnecessarily when they gave up their annuity early, because of the lies being spread by members of the securities industry. If these same annuity owners had known the truth, and had left their money in their annuity, they would continue to have full access to the use of their money in the form of withdrawals or annuitization, they would continue to earn a reasonable interest rate, their money would be safely guaranteed in a secure contract, and they would have never had to pay ANY surrender charges.
Thursday, January 11, 2007
There is NO EQUITY in Equity Indexed Annuities
The fact that someone decided to use the word “equity” in the name, when indexed annuities were first developed, is part of the reason why they have come under attack by some in the securities industry. But contrary to the claims of vocal opponents, use of this term is the only misleading thing about them, and efforts are underway to drop this confusing part of the label from this product. The reason the use of this word in the name is inaccurate, is that in an indexed annuity, the client is not purchasing equity in anything. Their money is not buying into any index either. An indexed annuity is an insurance contract, and every purchaser of one of these innovative financial products is buying a contract from an insurance carrier for a stated list of guaranteed benefits. The only connection an indexed annuity has with any index is that the annuity owner has the option to choose an interest crediting strategy, whereby the percentage of increase in the named index is used as a way to measure how much additional interest they will earn, above the guaranteed interest return stated in the contract.
Since an indexed annuity is a contract, and the client’s purchase money is never placed at risk in the market, indexed annuities are not investments or securities, but are unique savings vehicles with enormous safety, vital guarantees of security of principal, guaranteed minimal interest return, and income options that can provide the annuitant a guaranteed income they can never outlive.
If you are a retired individual or couple and you are now living on a fixed income with fixed assets, the last thing you can afford is to risk the security of either your assets or your income. Placing a chunk of your assets into an indexed annuity is an ideal vehicle for someone who wants to guarantee that their principal can never lose value, get a safe, reasonable return on their money, and have a chance to earn more than they could get at their bank in a CD or money market account. Add to that, if this person were to ever fear that they would not have enough money, they could at ANY time, convert their account to a guaranteed stream of income for life, no matter how long they might live.
Securities regulators and industry spokespeople who challenge the insurance identity of indexed annuities have wrongly used the uncertainty of this “extra” interest crediting, which is based upon the changes in the linked index, as a claim of risk. While the “extra” interest credits in an indexed annuity will fluctuate from period to period, and the results are not guaranteed, the principal deposits and all previously credited interest earnings are NEVER at risk. And the client’s money is NEVER placed in the index.
The insurance company has their own way of ensuring their performance in the contract by investing the client’s money in safe long term bonds and then buying options on the index, not with the client’s money, but from the earnings they make by investing the client’s money. This allows the insurance company to safely guarantee the client’s principal, offer a minimal guaranteed interest return, and provide the potential for a higher rate of return that merely uses the changes in the index as a clear measurement of how to calculate this “extra” interest. This one non-guaranteed feature of an indexed annuity is no more confusing than the potential for a bank to change their CD rates to existing customers upon renewal, based upon market changes. And yet, these securities regulators are not clamoring to have CDs regulated by the SEC.
Think of it like this. The index which is used in an indexed annuity to determine the amount of “extra” interest is simply a yardstick. It could just as easily be the change in the average temperature for a given year, the improvement of the number of points earned by your favorite team over last season. The fact that it uses a known stock index is not accidental, however, but the reasons are, once again, determined by the insurance company who offers the contract. Just like when you sign a contract for cellular phone service, you don’t concern yourself with HOW the company will provide the service; only that they will. If we can start calling indexed annuities what they truly are, a contract, and not an investment, then it will clear up a lot of the criticism and confusion that has been wrongly fueled by the use of the term equity in their name.
Since an indexed annuity is a contract, and the client’s purchase money is never placed at risk in the market, indexed annuities are not investments or securities, but are unique savings vehicles with enormous safety, vital guarantees of security of principal, guaranteed minimal interest return, and income options that can provide the annuitant a guaranteed income they can never outlive.
If you are a retired individual or couple and you are now living on a fixed income with fixed assets, the last thing you can afford is to risk the security of either your assets or your income. Placing a chunk of your assets into an indexed annuity is an ideal vehicle for someone who wants to guarantee that their principal can never lose value, get a safe, reasonable return on their money, and have a chance to earn more than they could get at their bank in a CD or money market account. Add to that, if this person were to ever fear that they would not have enough money, they could at ANY time, convert their account to a guaranteed stream of income for life, no matter how long they might live.
Securities regulators and industry spokespeople who challenge the insurance identity of indexed annuities have wrongly used the uncertainty of this “extra” interest crediting, which is based upon the changes in the linked index, as a claim of risk. While the “extra” interest credits in an indexed annuity will fluctuate from period to period, and the results are not guaranteed, the principal deposits and all previously credited interest earnings are NEVER at risk. And the client’s money is NEVER placed in the index.
The insurance company has their own way of ensuring their performance in the contract by investing the client’s money in safe long term bonds and then buying options on the index, not with the client’s money, but from the earnings they make by investing the client’s money. This allows the insurance company to safely guarantee the client’s principal, offer a minimal guaranteed interest return, and provide the potential for a higher rate of return that merely uses the changes in the index as a clear measurement of how to calculate this “extra” interest. This one non-guaranteed feature of an indexed annuity is no more confusing than the potential for a bank to change their CD rates to existing customers upon renewal, based upon market changes. And yet, these securities regulators are not clamoring to have CDs regulated by the SEC.
Think of it like this. The index which is used in an indexed annuity to determine the amount of “extra” interest is simply a yardstick. It could just as easily be the change in the average temperature for a given year, the improvement of the number of points earned by your favorite team over last season. The fact that it uses a known stock index is not accidental, however, but the reasons are, once again, determined by the insurance company who offers the contract. Just like when you sign a contract for cellular phone service, you don’t concern yourself with HOW the company will provide the service; only that they will. If we can start calling indexed annuities what they truly are, a contract, and not an investment, then it will clear up a lot of the criticism and confusion that has been wrongly fueled by the use of the term equity in their name.
Wednesday, January 10, 2007
Clearing the Confusion Between Variable Annuities and EIA’s
The SEC is presently reviewing the classification status of EIA’s, in all probability, due to the constant clamoring by former NASD chairman Robert Glauber that the identity of them is unclear to him. For those of us in the insurance industry, we do not find the pure insurance nature of indexed annuities difficult to understand nor accept. While there are a few features of EIA’s that are routinely mentioned in detractor’s arguments as they attempt to indicate that these insurance products could be mistaken as securities, it is the misstatements of these features that only confuse the nature of an otherwise very clear insurance contract. One of the tactics used by detractors of indexed annuities, and confused financial journalists, is to describe the features of variable annuities, a hybrid security and insurance product, but refer to indexed annuities, a guaranteed insurance contract.
To make the differences between these products easier to understand, let me first clarify the concept of a variable annuity. The defining features about a variable annuity, which causes it to be regulated as a security, is because of two very important distinctions from its pure insurance cousin. In a variable insurance product, the client assumes ALL of the investment risk, rather than the insurance company. This is why the insurance company is required to put all client funds for variable products in a “separate” account from their general fund. There is no guarantee that a variable annuity holder will earn any return on their investment, their original premiums are not guaranteed, and the value of their account can and does go down with the loss of value of the underlying investments. It is possible for a variable annuity owner to lose some, or even all of their original investment. Within a variable contract, the client chooses specifically how their funds will be allocated from a set of mutual fund-like investments options offered within the variable product.
The few guarantees included in a variable product do not stem from the securities side, but from the insurance side and are provided by a deduction of expense charges from the client’s assets within the separate account, and are charged periodically, regardless of how the investment is performing. It is this catch that has caused so many variable policies to risk lapsing, when their investment losses have reduced the account value to a point where it could no longer pay the insurance premiums for the guaranteed benefits. If this happens, the owner must either pay additional premiums to continue the policy, or the policy will lapse.
Quite different from a variable annuity, in an indexed annuity, the client does not incur ANY investment risk whatsoever. In fact, not only is their initial principal guaranteed, but in most policies, there is a minimum guaranteed rate of interest that is credited over the contract period. In the case of an EIA, unlike a variable product or a securities product, the client does not tell the insurance company how to invest their premium dollars. It is totally up to the insurance company to figure out how to provide the contractual guarantees of principal and interest.
Indexed annuities do not have any fees deducted from active accounts. All of the client’s premium funds are credited to the policy at issue, and no expenses are deducted from that account in the future. Agent sales commissions, company expenses, and profits are all earned by using arbitrage, the same techniques banks use to make money with client deposits. Premiums received for the purchase of indexed annuities are deposited in the insurance company’s general accounts and are invested by the insurance company, at their discretion; in a way that allows them to financially provide all of the contractually obligated policy benefits, pay their expenses, and make a profit for themselves.
Client premium deposits are 100% guaranteed, and interest earnings, once credited, in most cases are “locked in,” and the account can never go down unless the client takes money out. Since an indexed annuity is a contract, there are obligations and responsibilities stated in the policy for both parties to the contract. The insurance company agrees to provide the stated benefits over the policy period, and the client agrees to leave their premiums deposited with the company for a set period of time.
The insurance company does not have any provisions in the contract for breaking or canceling the contract and must provide all of the contracted benefits as agreed for the entire contract term. But in deference to the client, the only provision that is required of them, in order to enter this contract, is the deposit of premiums; and, if the client, for any reason, does not want to continue their part of the agreement, there is a provision in the contract for them to alter, or completely break the contract by way of partial or full surrender.
But like every contract, there is a penalty for such action, and in an indexed annuity that penalty is called a surrender charge. This penalty is never enforced and the fees are never charged until or unless the client withdrawals exceed a contractually allowed annual amount during the surrender period. Surrender charges are clearly stated in the contract, and a schedule of guaranteed surrender values for any future year is provided. This puts the client in complete control of how and when they access their money, and whether or not they will ever incur any surrender charges.
To make the differences between these products easier to understand, let me first clarify the concept of a variable annuity. The defining features about a variable annuity, which causes it to be regulated as a security, is because of two very important distinctions from its pure insurance cousin. In a variable insurance product, the client assumes ALL of the investment risk, rather than the insurance company. This is why the insurance company is required to put all client funds for variable products in a “separate” account from their general fund. There is no guarantee that a variable annuity holder will earn any return on their investment, their original premiums are not guaranteed, and the value of their account can and does go down with the loss of value of the underlying investments. It is possible for a variable annuity owner to lose some, or even all of their original investment. Within a variable contract, the client chooses specifically how their funds will be allocated from a set of mutual fund-like investments options offered within the variable product.
The few guarantees included in a variable product do not stem from the securities side, but from the insurance side and are provided by a deduction of expense charges from the client’s assets within the separate account, and are charged periodically, regardless of how the investment is performing. It is this catch that has caused so many variable policies to risk lapsing, when their investment losses have reduced the account value to a point where it could no longer pay the insurance premiums for the guaranteed benefits. If this happens, the owner must either pay additional premiums to continue the policy, or the policy will lapse.
Quite different from a variable annuity, in an indexed annuity, the client does not incur ANY investment risk whatsoever. In fact, not only is their initial principal guaranteed, but in most policies, there is a minimum guaranteed rate of interest that is credited over the contract period. In the case of an EIA, unlike a variable product or a securities product, the client does not tell the insurance company how to invest their premium dollars. It is totally up to the insurance company to figure out how to provide the contractual guarantees of principal and interest.
Indexed annuities do not have any fees deducted from active accounts. All of the client’s premium funds are credited to the policy at issue, and no expenses are deducted from that account in the future. Agent sales commissions, company expenses, and profits are all earned by using arbitrage, the same techniques banks use to make money with client deposits. Premiums received for the purchase of indexed annuities are deposited in the insurance company’s general accounts and are invested by the insurance company, at their discretion; in a way that allows them to financially provide all of the contractually obligated policy benefits, pay their expenses, and make a profit for themselves.
Client premium deposits are 100% guaranteed, and interest earnings, once credited, in most cases are “locked in,” and the account can never go down unless the client takes money out. Since an indexed annuity is a contract, there are obligations and responsibilities stated in the policy for both parties to the contract. The insurance company agrees to provide the stated benefits over the policy period, and the client agrees to leave their premiums deposited with the company for a set period of time.
The insurance company does not have any provisions in the contract for breaking or canceling the contract and must provide all of the contracted benefits as agreed for the entire contract term. But in deference to the client, the only provision that is required of them, in order to enter this contract, is the deposit of premiums; and, if the client, for any reason, does not want to continue their part of the agreement, there is a provision in the contract for them to alter, or completely break the contract by way of partial or full surrender.
But like every contract, there is a penalty for such action, and in an indexed annuity that penalty is called a surrender charge. This penalty is never enforced and the fees are never charged until or unless the client withdrawals exceed a contractually allowed annual amount during the surrender period. Surrender charges are clearly stated in the contract, and a schedule of guaranteed surrender values for any future year is provided. This puts the client in complete control of how and when they access their money, and whether or not they will ever incur any surrender charges.
Tuesday, January 09, 2007
Why Indexed Annuities Are CLEARLY Insurance
Since the SEC has become involved in the debate about whether or not to reclassify the insurance identity of EIA’s, it is important that they consider a few key elements about indexed annuities which clearly differentiate them from the components necessary for a product to be classified as a security.
The key word in eliminating any confusion on this discussion has to be RISK. Securities are regulated in the manner they are because any investor buying a security accepts a huge amount of risk, and the intense regulation is designed to make sure that an investor only takes on that risk with complete and factual information. EVERY securities product offered has the “potential” for the investor to lose some or ALL of their investment capital. This fact is essential to grasp if you are going to understand the complete difference between an indexed annuity and EVERY securities product.
In any purchase of a security, the client assumes ALL of the investment risk. That means that the investor acknowledges, at the onset, that they realize there is absolutely no certainty that their investment will ever earn them one dime in return, and that they could possibly lose some, or ALL, of their original investment. In an indexed annuity, however, the client does not assume ANY investment risk whatsoever; the insurance company retains it all. The client does not tell the insurance company how to invest their premium dollars in order to make sure that the company can later fulfill the contractual obligations. The insurance company is responsible for managing the premiums they receive in the purchase of indexed annuities in a way to be able to provide the contracted benefits to all policy holders. The oversight responsibility to ascertain the ability of an insurance carrier to financially do this is monitored, not only by the state insurance departments where they do business, but is regularly reviewed by a number of independent rating agencies, such as A.M Best, S&P, and Weiss.
The client’s premium dollars used to buy an indexed annuity are therefore, not an investment in any security, but are the purchase of a very specific and detailed, long term insurance contract between the annuity purchaser and the insurance company. This contract entitles the owner to a group of benefits, including interest credits on money deposited, income options, withdrawal privileges, death benefits, and the terms and conditions for early partial of full surrender of the contract. The policy, along with all of its details are provided to the client up front in writing and the client is even given a state mandated right of refusal period before they are bound by the terms of the contract.
If this is not enough proof, the enormous distinction that labels indexed annuities as insurance are in the guarantees provided in the insurance contract that are completely absent from any securities purchase. The client’s premium dollars are guaranteed not to lose value, within the terms of the contract. In most indexed annuities, a minimum rate of return over the life of the contract is also guaranteed. In addition to the guarantee of premium deposits and the minimum interest credits, the unique feature which gives indexed annuities their name, is that the client is offered the potential to receive a higher rate of interest, determined by a clearly defined strategy of using changes in some named index as the measurement of how much extra interest to credit over given periods of time. And the best feature included in most indexed annuities is that once interest has been credited to an account, it is “locked in.” That means that the only way a client’s account value can ever go down, is for them to personally and intentionally reach in and take money out of their contract.
In a later blog I plan to address some of the rhetorical misstatements and lies used by the opponents of indexed annuities. But for now, just using the above information, I hope that the SEC, and anyone else who has questioned the insurance identity of indexed annuities, now understands why they are in no way a securities product, and should never be brought under the jurisdiction of the NASD or any other securities regulatory agency.
The key word in eliminating any confusion on this discussion has to be RISK. Securities are regulated in the manner they are because any investor buying a security accepts a huge amount of risk, and the intense regulation is designed to make sure that an investor only takes on that risk with complete and factual information. EVERY securities product offered has the “potential” for the investor to lose some or ALL of their investment capital. This fact is essential to grasp if you are going to understand the complete difference between an indexed annuity and EVERY securities product.
In any purchase of a security, the client assumes ALL of the investment risk. That means that the investor acknowledges, at the onset, that they realize there is absolutely no certainty that their investment will ever earn them one dime in return, and that they could possibly lose some, or ALL, of their original investment. In an indexed annuity, however, the client does not assume ANY investment risk whatsoever; the insurance company retains it all. The client does not tell the insurance company how to invest their premium dollars in order to make sure that the company can later fulfill the contractual obligations. The insurance company is responsible for managing the premiums they receive in the purchase of indexed annuities in a way to be able to provide the contracted benefits to all policy holders. The oversight responsibility to ascertain the ability of an insurance carrier to financially do this is monitored, not only by the state insurance departments where they do business, but is regularly reviewed by a number of independent rating agencies, such as A.M Best, S&P, and Weiss.
The client’s premium dollars used to buy an indexed annuity are therefore, not an investment in any security, but are the purchase of a very specific and detailed, long term insurance contract between the annuity purchaser and the insurance company. This contract entitles the owner to a group of benefits, including interest credits on money deposited, income options, withdrawal privileges, death benefits, and the terms and conditions for early partial of full surrender of the contract. The policy, along with all of its details are provided to the client up front in writing and the client is even given a state mandated right of refusal period before they are bound by the terms of the contract.
If this is not enough proof, the enormous distinction that labels indexed annuities as insurance are in the guarantees provided in the insurance contract that are completely absent from any securities purchase. The client’s premium dollars are guaranteed not to lose value, within the terms of the contract. In most indexed annuities, a minimum rate of return over the life of the contract is also guaranteed. In addition to the guarantee of premium deposits and the minimum interest credits, the unique feature which gives indexed annuities their name, is that the client is offered the potential to receive a higher rate of interest, determined by a clearly defined strategy of using changes in some named index as the measurement of how much extra interest to credit over given periods of time. And the best feature included in most indexed annuities is that once interest has been credited to an account, it is “locked in.” That means that the only way a client’s account value can ever go down, is for them to personally and intentionally reach in and take money out of their contract.
In a later blog I plan to address some of the rhetorical misstatements and lies used by the opponents of indexed annuities. But for now, just using the above information, I hope that the SEC, and anyone else who has questioned the insurance identity of indexed annuities, now understands why they are in no way a securities product, and should never be brought under the jurisdiction of the NASD or any other securities regulatory agency.
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